Every year I inevitably have a few clients that bring in statements from a charity thanking my client’s business for the donation of my client’s services or goods with a fair market value of X dollars. Of course they want to write it off as a charitable deduction. The first question I have for them is, “Did you include it in your taxable income, otherwise how many dollars did you actually spend to provide the services or buy the goods donated?”

The answer to the first part is always no! At that point, if they provided the services themselves, the answer is no deduction. If they used a hired worker to perform the services – they are already getting a deduction when they deduct the workers’ wage. For goods or materials donated they will get a deduction when they write off the purchase from the supplier or take inventory.

But why can’t they use the fair market value for the deduction? The simple answer is you cannot take a deduction for donating theoretical pretax profits! Compare the woman who donates $100 cash to the man who donates $100 of his time. Besides the the value of the man’s time being subjective and subject to abuse, the woman’s $100 cash started as approximately $130 of services or $130 of markup on goods, and then she paid $30 of tax, leaving her with $100 to donate. When she donates it, the taxing authorities give her a deduction to basically rebate her for the $30 in tax she already paid. The man has not included his $100 in income and has paid no tax, so he has nothing to rebate, and is therefore not entitled to a deduction.

Donations are generally limited to your cost basis in the donation. However, there are exceptions. In a future issue, I will discuss why donating appreciated stock is much more effective than donating goods, services, or cash.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.